EconSouth (Fourth Quarter 2004)

EconSouth (Fourth Quarter 2004)

Hammered by four hurricanes in the fall of 2004, Florida now
faces a variety of economic challenges. Not since 1964 has the state been hit
by multiple storms over such a short period.

Photo courtesy of the Federal Emergency Management
Agency

From mid-August through late September 2004, hurricanes Charley, Frances, Ivan, and Jeanne plowed through Florida, killing dozens of people and causing billions of dollars in damages. Together the four storms created the worst hurricane losses since 1992, when Andrew roared through southern Florida. Not to be forgotten, however, are the impacts beyond the Sunshine State. Southern Alabama also suffered severe damage from Hurricane Ivan, and heavy storms rained down on parts of Mississippi, Louisiana, and Georgia. But the bulk of the damage was in Florida, and the economic impact there is considerable.

Floridas economy has been an engine of growth not only for the Southeast
but for the United States. In fact, Florida added jobs in 2002 and 2003 when
the nation as a whole continued to see employment levels decline (see
chart 1). During the past year the rest of the country has started to recover
and by several measures has caught up with Florida. Nevertheless, through October,
more than 40 percent of all U.S. payroll gains since the end of the recession
were in Florida. The question is whether the 2004 hurricanes have derailed Floridas
booming economy.

The hurricanes immediate impact on Floridas economy was
clearly negative as storm damage and power losses curtailed economic activity.
The downturn should not last long, however, and the states economy
will likely perform well in 2005.

Photo courtesy of UltimateChase.com

Even though hurricane damage was severe in a few areas, large-scale economic
disruptions will probably be short-lived. Higher insurance deductibles and inadequate
flood coverage may have affected consumers pocketbooks enough to have
a negative impact on consumer spending in the short term, but reconstruction
outlays will likely make up for any temporary slowdown. Damage to agricultural
areas, on the other hand, may take longer to mend, and the outlook for tourism
poses a number of unanswered questions.

Assessing the immediate damage
Insurance companies are paying over two million claims in Floridanearly
three times the number of claims from Hurricane Andrew in 1992to customers
whose property was damaged or destroyed by the 2004 hurricanes. The Insurance
Information Institute estimates that payments for storm damage will be between
$22 billion and $23 billion, surpassing the $20 billion paid out in the wake
of Andrew (see chart 2). The institute also estimates
that more than one out of every five Florida homes has been damaged by the hurricanes.

The impact on employment. But placing a dollar amount on the damage
does not adequately measure the hurricanes overall effect on Floridas
economy. The impact on employment is also an important indicator.

Gathering data to adequately measure the hurricanes effect on jobs is difficult, and it may be well into 2005 before a clearer picture emerges. Estimates of payroll employment are reduced only when people have been off work for an entire pay period and not paid for the time missed. While some employed persons were off payrolls during the survey reference period for reasons related to the hurricanes effects, some jobs were added as part of recovery efforts. Of course, the Bureau of Labor Statistics household survey showed that unemployment spiked in the most affected areas in the immediate wake of the storms but has since declined.

Chart
1
Payroll Employment

Source: Bureau of Labor Statistics, Federal Reserve Bank of Atlanta

One employment indicator that was immediately measurable was a huge spike in
initial unemployment insurance claims. New claimants jumped in the late summer
as a result of the hurricanes. Weekly data show that initial claims had dropped
back to prehurricane levels by mid-November.

Looking beyond Florida. The impact of the hurricanes will likely be
felt beyond the Sunshine State. For example, the rebuilding that pulls construction
materials and labor to Florida and southern Alabama may push up prices for these
goods and services in nonaffected areas as well as damaged areas of the Southeast
and even in areas beyond the region. An increase in prices in the immediate
wake of storms is not unexpected as supply moves to catch up with increased
demand. Anecdotal evidence and the fact that construction was already at very
healthy levels before the hurricanes lead many analysts to believe that prices
may remain elevated into 2005.

Oil production in the Gulf of Mexico is still reeling in the wake of Ivan. Oil rig shutdowns and evacuations as the hurricane approached caused expected disruptions, but these were exacerbated by damage to underwater pipelines. Most of the repairs to damaged drilling rigs and production platforms in the Gulf have been completed, but nine rigs remain out of commission at press time. More importantly, pipeline damage caused by Ivan has shut off nearly 6 percent of the Gulf of Mexicos annual oil production as of early November. Industry experts fear that it may take several months for repairs to the pipeline to be completed.

Determining the outlook
Even though the precise toll on Floridas economy may not be known at this point, some general assumptions can be made. Clearly, the economic impact was initially negative during the first several weeks following each hurricane as normal patterns of economic activity were disrupted. But by the fourth quarter of 2004 reconstruction was under way, and the economic impact turned more positive.

Overall, the states economy will likely recover quickly. Floridas strong employment and demographic trends should persist despite storm damage. In fact, during the near term, employment may well increase as workers are added in emergency services, cleanup, and construction.

As devastating as the hurricanes were, a number of businesses are benefiting. From firms that provide emergency preparedness analysis and training to businesses that furnish products and services to help in the reconstruction, a number of companies are well positioned to take advantage of rising demand for their services. Many new construction jobs may be created in the rebuilding effort, and job gains may also occur in other industries such as retail, utilities, business services, and insurance.

Chart
2
Insurance Payments for the
10 Costliest U.S. Hurricanes

Source: Insurance Information Institute

A number of other factors need to be considered before the final assessment
of the economic impact of the 2004 hurricanes can be made, however. The capacity
of Floridas economy to escape long-term damage will depend on how quickly
the infrastructure is restored. Expeditious repairs will support the areas
recovery, but delays in rebuilding infrastructure or facilities could result
in longer-lasting economic damage. In addition, different industries face diverse
challenges.

Construction. Developments already under way and those on the drawing
board may be delayed as resources are diverted toward rebuilding. But rebuilding
could have beneficial effects if the new construction generates additional investment
and improvements in the physical infrastructure. One probable long-term outcome
of 2004s storms in Florida and Alabama will be that less sturdily built
houses, including mobile homes and manufactured housing, will be replaced with
stronger structures better able to withstand hurricane-force winds. This added
investment ultimately will improve the quality of the housing stock, generate
greater property tax revenue, and entice residents to the area.

Manufacturing. Although only 2.7 percent of Floridas workers are
employed in manufacturing, the sector was not untouched by the storms. Reports
from manufacturers suggest that some smaller operations were hurt, but larger
establishments were only temporarily disrupted by the hurricanes. Transportation
delays with regard to receiving supplies had a more serious and lingering impact
on manufacturers than actual storm damage did.

Tourism. Floridas tourism industry may face stiffer competition
for vacation dollars in the aftermath of the hurricanes. Destinations outside
Florida could benefit from nervousness about visiting the state. Over the longer
term, there are worries that the flow of retirees moving from Northern states
may taper off, or perhaps businesses pondering relocating to the state may reconsider.
Its too early to tell if these concerns will materialize, but Floridas
tourism industry officials have allocated millions of dollars to an advertising
campaign designed to reassure vacationers, retirees, and executives that Florida
remains a prime location for recreation, comfort, and business.

Thom Stork, president and CEO of the Florida Aquarium in Tampa and chairman-elect
of Visit Florida, a private/public partnership established to promote Florida
tourism, feels that the states tourism industry is in good shape. Florida
is up and running and open for business, he said. Even in areas
that were hit by the hurricanes, repairs are being made and most damaged hotels
and resorts are back open. He also noted that winter business has been
very good so far, and he did not expect that pattern to change. In Palm Beach,
for example, 2005 advance bookings for large resorts are running ahead of the
previous years levels.

Photo courtesy of the Federal Emergency Management Agency

One probable long-term outcome of 2004's storms in Florida
and Alabama will be that less sturdily build houses, including mobile homes
and manufactured housing, will be replaced with stronger structures better
able to withstand hurricane-force winds.

The hurricanes ultimate effect on tourism may well depend on how much
damage was done to Floridas reputation. The most affected areas of the
states tourism lodging industry are all in minor markets, according to
Scott Berman, a partner in the global hospitality and leisure consulting practice
with PricewaterhouseCoopers. The hardest-hit lodging markets, which include
Pensacola, Melbourne, and Port Charlotte, are all relatively small compared
to other Florida markets, he said. Floridas major destinationsMiami,
Fort Lauderdale, Orlando, Tampa, and Napleshave been largely unaffected.
Some hotels and resorts in these markets suffered modest damage, but all were
up and running in short order.

Economic damage to the cruise industry is yet another factor. Royal Caribbean
Cruises, which canceled three cruises and switched routes on seven others, said
Frances was the most disruptive storm in the lines 33-year history. The
Miami-based company announced that costs from the storm have hurt profits. Other
cruise lines faced similar challenges.

Whether the four hurricanes will have a long-term effect on tourists
plans to visit Florida is unclear. A survey issued by the Orlando-based travel
marketing, advertising, and public relations firm of Yesawich, Pepperdine, Brown
& Russell shows that there may be some negative fallout. The study, conducted
on the heels of Hurricane Jeanne, revealed that 5 percent of travelers who had
plans to visit the state prior to the arrival of the hurricanes cancelled trips
as a result. An additional 4 percent postponed a trip. More importantly, 20
percent reported that they were less likely to visit Florida in the remainder
of 2004, and a comparable percentage indicated they were less likely to visit
the state between July and September of 2005. In addition, tourism officials
also worry that meeting and convention bookers may choose other locations for
their events. Florida officials are developing an insurance product that would
cover potential losses to organizations should their conventions be postponed
because of hurricanes.

Visit Florida survey research found that 20 percent of potential visitors were concerned about returning to the state during 2005s hurricane season. If all those people stayed away, it would result in a $6.7 billion loss in expenditures, Stork said.

Agriculture. Hurricane damage to Florida farms was estimated at nearly
$3 billion. The U.S. Department of Agriculture reported that Florida orange
production levels were 27 percent lower than last years, and the grapefruit
harvest was 63 percent lower. Industry contacts expect only a moderate impact
on the price of orange juice because of strong global supply conditions. The
longer-term outlook for citrus production could be threatened by tree damage
and the potential spread of disease.

Natures
Fury:
Hurricanes in Florida in 2004

In addition, Florida is the nations largest producer of greenhouse and
nursery plants, which generated cash receipts of approximately $1.6 billion
in 2003. The hurricanes hit key production areas, with damages reportedly ranging
from $400 million to $600 million.

Storm damage to Floridas cattle industry is estimated to be between $100 million and $150 million. There were few direct cattle losses, but damage to farm and ranch structures and forage crops was severe.

Consumer spending. The hurricanes short-term effect on consumer
spending may be modest. Increased spending for prestorm stockpiling of emergency
goods and repair purchases after the hurricane may turn out to be more significant
than the loss of sales during the storms and their aftermath. The hurricanes
effects may prove more significant with regard to the pattern of spending than
the amount.

The storms longer-term impact is somewhat uncertain. Because most insurance contracts treat each storm as a separate event, some homeowners are contending with multiple deductibles from damage by separate storms. In addition, changes in insurance rules since Andrew include the restructuring of deductible payments from a fixed-dollar value to a percentage of the total claim, which raises the deductible share of large claims.

Nevertheless, Floridas retailers are optimistic. According to a recent survey, 75 percent of Florida retailers expect the fourth quarter to be similar or better than the same quarter last year, said Rick McAllister, president and CEO of the Florida Retail Federation.

Smaller retailers in hard-hit areas are facing their own set of problems, McAllister noted. While acknowledging that many consumers facing large deductibles have experienced severe dents in their wallets, the overall outlook for consumer spending in the state as a whole is positive.

What about the less fortunate?
Along with the larger view of Floridas economy, it is also important to remember that natural disasters affect different people in different ways. Estimated recovery periods will be significantly different for low- to moderate-income households. Those with adequate insurance and cash on hand will be back on their feet in short order, but for the less affluent, recovery may take much longer.

The hurricanes took a large toll on some of Floridas poorer regions. Recent data from the U.S. Census Bureau show that hard-hit Escambia County, which includes the city of Pensacola, replaced Miami-Dade in 2003 as Floridas poorest county. In fact, Escambia County is the 17th poorest county in the nation, according to census figures. Nearly 56,000 people19 percent of the countys total populationlived below the poverty line in 2003.

Photo courtesy of the Federal Emergency Management
Agency

The decline in manufacturing employmentespecially in the chemical and
paper industries, which typically pay higher wages than do the industries serving
Escambia Countys large tourist and retirement communitieshas played
a role in lowering the cost of living and pushing up the level of poverty in
the county.

In addition to those living in poverty, many Floridians exist just above the
poverty line. Although some of these less affluent workers may have jobs as
part of the cleanup and reconstruction in the hurricanes aftermath, many
of them depend on fixed incomes or weekly paychecks from jobs in the hard-hit
retail and tourism industries. Because the storms destroyed or severely damaged
their places of work, a number of these low-income wage earners may not be receiving
paychecks for some time. Many small businesses will never reopen, and their
employees will be forced to find work elsewhere.

Private and government relief efforts will help many of the poor, but not all. Thousands of illegal immigrant laborers risk falling through the cracks of disaster recovery. Some undocumented workers may fear that they will face deportation if they seek aid, and many others may be unaware that help is available.

The pressure less affluent people face in simply earning a living in the wake of the hurricanes is exacerbated by the fact that many have sustained severe damage to their homes. Many live in mobile or trailer homes, and the older of these homes were harder hit than traditional structures.

According to 2000 U.S. Census data, Florida has nearly 850,000 mobile homes, accounting for about 12 percent of the states single-family housing stock. The Florida Manufactured Housing Association reports that this number may be low, noting that 19 percent is probably more accurate.

Short-term downturn, long-term questions
The hurricanes immediate impact on Floridas economy was clearly negative as storm damage and power losses curtailed economic activity. The downturn should not last long, however, and the states economy will likely perform well in 2005. Yet a number of unanswered questions remain, including what long-term impact the disasters will have on Floridas important tourism and agriculture sectors as well as the impact on the less affluent.

While making hard economic assessments of natural disasters, it is vital to keep in mind the human cost in terms of deaths, injuries, damaged property, and disrupted lives. The people of Florida and other affected areas have faced challenges difficult to imagine and impossible to calculate in cold economic terms. Nevertheless, Floridas economy is recovering, and its citizens are pulling through.

This article was written by Michael Chriszt, director of international
and regional analysis for the regional group of the Atlanta Fed's research department.